Stashing cash finally pays off as savings interest rates rise from rock bottom in wake of Fed hikes
- The interest rates on savings accounts are finally on the rise after consecutive rate hikes by the Federal Reserve.
- Still, any money earning less than the rate of inflation loses purchasing power over time.
- There is one inflation-protected bet savers should consider.
There's a silver lining to higher interest rates: Stashing some cash finally pays.
Soaring inflation, which pushed the Federal Reserve into hiking its benchmark rate, is having an effect on the return savers stand to get on their money, at long last.
While the Fed has no direct influence on deposit rates, they tend to be correlated to changes in the target federal funds rate. As a result, the savings account rates at some of the largest retail banks have been barely above rock bottom since the Covid pandemic crisis began — currently a mere 0.08%, on average.
With interest rates now on the rise, "things are starting to accelerate," said Ken Tumin, founder of DepositAccounts.com.
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Last month, the average online savings account rate notched its largest monthly gain since 2017, according to his analysis.
Online-only banks such as Marcus by Goldman Sachs and Ally Bank offer higher returns, thanks in part to lower overhead expenses than traditional banks.
At Marcus, the average online savings account rate is currently around 1%, more than 12 times the rate from a traditional, brick-and-mortar bank.
"If your dollars are not stretching as far, it's a great time to take a step back and look at your financial picture and be a little more strategic," said Liz Ewing, chief financial officer at Marcus.
As the U.S. central bank continues its rate-hiking cycle, these yields will continue to rise as well, she added. "When the Fed makes a move, that will translate into changes in rates in the banking products customers are using," she said. "[A high-yield savings account] seems like a no-brainer."
Historically, an old-fashioned certificate of deposit was another way to lock in a slightly better return.
Currently, one-year CDs are averaging 1.5% and top-yielding CD rates pay over 2%, even better than a high-yield savings account.
The CDs that offer the highest yields typically have higher minimum deposit requirements and require longer periods to maturity.
However, because the inflation rate is now higher than all of these rates, any money in savings loses purchasing power over time.
Rather than lock in funds below the rate of inflation, "the best deal right now is [series] I bonds," Tumin said of finding an inflation-protected return.
These assets are backed by the federal government, making them nearly risk-free, and pay a 9.62% annual rate through October, the highest yield on record.
Although there are purchase limits and you can't tap the money for at least one year, you'll score a much better return than a savings account or a one-year CD.